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After the February 1979 Islamic Revolution, and based on March 1979 referendum, Iran became an “Islamic Republic”. The fundamental concept of this Islamic government is modeled after Ayatollah Khomeini´s idea on the rule of the jurisprudent (Velayat-e-Faghih). This means that the state is to be guided by a learned religious jurist. Having this in mind, the Islamic Republic appears to be a unique form of government where “Islamic “ and “Republican” structures run parallel to each other. Therefore, Iran´s system of government may be acknowledged as a blend of democracy and theocracy with authority derived from the constitution enacted in 1979 and revised in 1989. Now let us see how the power structure and the legal structure of Iran look like.

1) Under the provisions of the Constitution, the government in Iran is structured to have three branches of authority under the chief of state, as the Supreme Leader. These are: the Judiciary, the Majles (Parliament) and the Executive power, with the President at its head. While the Majles and the President are elected through direct people´s vote, the head of the Judiciary is elected from the Supreme Leader directly. The Supreme Leader himself is appointed by the Assembly of Experts , members of which are elected again by people´s vote.

2) In The legal structure of Iran, The highest authority in the country is the Leader (Article5) who exercises combined supreme political and religious power. He can also influence all economic matters according to the powers vested in him by the Constitution (Article 110).

3) Next to the Leader, the President is the highest authority in the country (Article 113). Among his diverse responsibilities, the President signs and supervises the implementation of laws passed by the Majles and supervises the implementation of the budget and development plans ratified by the same body. He heads the Cabinet and appoints and dismisses Ministers with the consent of the Majles. The latter itself has the power to impeach individual Ministers in addition to having the power to impeach the Council of Ministers collectively (Article 89).
The President´s office consists of the Secretariat, Advisors and Deputies to the President. He also has seven aides in charge of the seven institutions administered by him including the Management and Planning Organization (formerly the Plan & Budget Organization). The President also acts as the chairman to the Supreme National Security Council – an influential committee that supervises all government activities related to defense, foreign policy and the like.

4) The legislature consists of the Islamic Consultative Assembly or Majles (Parliament) and the Guardian Council of the Constitution. All legislation must first be approved by Majles and then ratified by the Guardian Council (Article 94). Resolutions normally become law, when passed by a simple majority of those attending, unless otherwise required by law. Quorum is reached by attendance of two-thirds of the members of the Parliament. These rules change for emergency situations. Under the provision of Article 69 of the Constitution all deliberations of the Majles must be open and a full report of these must be broadcasted by radio and then published verbatim by the Official Gazette.

5) The Guardian Council checks all laws passed by the Majles for compatibility with the Constitution and the Islamic tenets (Articles 91 & 94). The Council itself has twelve members, six of whom are clerical Islamic canonists appointed by the Leader with the power to rule on the compatibility of all legislation with Islamic principles via simple majority of these six. The other six are elected by the Majles from among 12 jurists whose candidature is put forward by the head of the Judiciary. Compatibility with the constitution is decided by a majority of the whole Council. The Guardian Council´s role is in effect like that of an upper house of parliament than can vote out the lower house´s resolution. In the case of a disagreement, although the Majles can send the relevant bill back to the Guardian Council for a second reading, the options are open to the Majles if it still disagrees either to accept the ruling of the Guardian Council or refer to the Expediency Council. In addition the Guardian Council is responsible for interpreting constitutional law and supervising elections vetting candidates that are deemed unqualified to run and also validating the election results to protect against fraud.

6) The Expediency Council was first established on a temporary basis in February 1988 to resolve any disputes that arose between the Majles and the Council of Guardians as described above. Later on Article 112 of the 1989 amended Constitution, made it a permanent institution and added to its duties an advisory role to the Leader.
The Expediency Council is slowly becoming one of the important actors in the decision-making process of Iran. Besides, it should be noted that this body, to some extend, could overrule the Constitution, if it is expedient and deemed in the interests of the country to do so.

Introduction to the legal structure of Iran

As we see, the government structure has resulted in an economic policy making and implementation environment where decisions reflect a dynamic flex of competing interests because in practice no institution wields absolute power. The arrangement of each institution is such that makes it vertically and horizontally accountable (even the supreme Leader is subject to a system of checks and balances).

Now let´s have a look at how Iran´s economic system has been portrayed by the Constitution (Articles 43, 44 & 45) with a special emphasize on Article 44, that is nowadays making very much publicity due to the privatization of state owned companies ordered by the Leader:

Article 44 of the Constitution states that the economic system of the I.R.Iran is based on public, cooperative and private sectors, with proper and regulated planning. It then defines the public sector to include all large-scale industries, mother industries, foreign trade, large mines, banking, insurance, provision of power, dams and large irrigation channels, radio and television, post, telegraph and telephone, aviation, shipping, road, railways and the like, which are in public ownership and at the disposal of the government. There have been new interpretations to this part of the Constitution by the Expediency Council, which will be presented further below as it reflects the current on-goings to the privatization of the industries.

The cooperative sector is defined as one that includes cooperative production and distribution companies and institutions established in cities and villages on the basis of Islamic principles, while the private sector includes that part of agriculture, animal husbandry, industry, trade and services, which complements public and cooperative economic activities. Thus, the private sector is given only a residual role in the economy, which in fact is intended to be changed. I may come back to this theme once I have presented a somewhat clear overview of the general framework some Newsletters from now and discuss particular industry and market segments and the impact the privatization has on them.

Amendments to Article 44:
Expediency Discretion Council (EDC) drafted the general policies of which the article 44 of the Constitution as a first step obligated the government to stop all its activities outside the fields specified under the main section of the article 44.
After approving the above mentioned, namely the requirement of the government to abandon activities not enumerated under the main section of the article 44, the EDC approved the second paragraph of general policies, which allows the public non-state sector, as well as the private and cooperative sectors to embark on a number of activities that had been allocated to public sector under the main section of the article 44.

Besides the EDC agreed to transfer maximum 65% of the stocks of government enterprises subject to the main section of the article 44 to private, cooperative and public non-state sectors. The agreement covers all major mines , main industries, banks, insurance corporations etc. But defense and security industries (as identified by the commander in chief) and also National Oil Company and oil producing corporations are excluded.
It was then decided, that in respect of state owned companies, the revenue out of the transfers of their stocks to be deposited in a special account with the Treasury. It then would be spent within the frame of the approved plan and budget for implementing social justice and poverty alleviation policies through: self sufficiency of needy families, strengthening of the comprehensive plan for social security, creation of infrastructure for economic development while giving priority to less developed regions, granting facilities (managed funds) for cooperatives and renovation and improvement of non-government sectors in development of less developed regions, partnership of state-owned companies for a share of less than 50% with non-state sectors for development of less developed areas and completion of semi-finished projects of state companies and their new investments by due regard to general policies.
As regards the transfer of banks, the funds collected from such transfers shall be used for repayment of the government´s debts to the banking system in the first place, and thereafter for increasing the capital of the government in banks that would remain governmental.
The revenue from transfer of insurance companies shall also be used for increasing the government´s capital in the Central Insurance of Iran.

In the last 12 month we do see some acceleration in the privatization process, which for example lead to the trading of the stocks of the National Iranian Copper Co., the Iranian Shipping Lines, some Petrochemical and very important Steel companies and the most recent one, with the biggest trade offering in Tehran Stock Exchange Market belonging to the Telecommunication Company of Iran with around 7.5 billion USD for the first 5% offered.

Article 43 of the Constitution with its delineation of the objectives of economic activities influences the role that the Iranian state envisages for itself. It defines the basic needs for all. Basic needs as laid out in this article include housing, nutrition, clothing, health, medical treatment, education and necessary conditions for the setting up of a family. In addition this section of the Constitution also proposes the creation of work conditions and opportunities for all, for the purpose of achieving full employment or providing opportunities for work.

Article 45 of the Constitution reinforces the primacy of the public sector by explicitly stating that public wealth such as barren or deserted lands, mines, passes, woods, reed beds, natural groves, unbounded pastures, legacy without heir, property whose owner is unknown and public property taken from usurpers is at the disposal of the Islamic Government to be dispensed with according to public interests. It also states that the details and the manner of utilization of each one of them will be determined by law.

At the end it is important to note that a strict interpretation of the definitions of the Articles 43-45 has never been enforced and due to the developments of new conditions and through the interpretation process, new laws has been passed allowing the private sector to be able to play a much larger role than is outlined in the Constitution. The private sector´s increased participation in mining, banking, insurance, telecommunication, oil and gas, aviation, transportation etc. in recent years is an obvious result of this re-thinking.

After going to the Articles of the Iranian constitution in our previous posts, this time I intend to go briefly into the 2 main processes that help the government set national priorities, make decisions and implement its economic policies:

– Five year development planning

– Annual budget

The Management and Planning Organization (MPO) is the main actor in these processes. It plays all the pivotal roles between the Majles, Cabinet and the executive bodies. It is worth mentioning that since the Constitution decrees that the President and his ministers collectively and individually are held accountable to the Majles, all other government organizations must be affiliated to one of the ministries or the office of the President unless they are under the Leader.

Hence, at the core of the various organizational units that constitute the central government, there are the Ministries. The MPO which recently has been formed by the merger of two key organizations namely the Plan & Budget Organization and the State Organization for Administrative and Employment Affairs is attached to the Presidency and is responsible for planning, budget formulation, monitoring and evaluation and personnel regulations. So, compared to some other countries that have a planning office, the MPO is a much stronger body because it has authority over the entire budget (both current and capital) and also over personnel regulations.
On the executive part and in addition to other functions the Ministry of Economic Affairs and Finance is responsible for budget execution, treasury functions and tax collection.

Development Planning
Five year development plans are the government´s main vehicle for implementing structural adjustment policies and economic reforms. Iran´s planning tradition goes back to 1931. The first serious plan and planning organization were launched in 1949. Iran has experienced five development plans before 1979 and now is at the last year of the fourth development plan after the revolution, which has started in March 2005.

The five year development plan is prepared by the MPO in consultation with sector ministries and universities. It is discussed at great length among the Cabinet, the Majles and the Guardian Council and becomes a law. Implementation of the plan is the responsibility of the executive bodies. Each executive body is required to submit an annual performance report to the MPO about the implementation of the plan, which also complements theirs budget request. The President is required to submit annual progress reports to the Majles, discussing the performance of the entire government no later than the end of August of the following year.

Since the plans act as a roadmap for five years, all executive bodies do their best to somehow have their intended policies in it. The plan lays out the medium term development objectives of the government and a medium term expenditure framework.

Annual Budget
Iranian Constitution states that the annual budget of the country will be drawn up by the government and submitted to the Majles for discussion and approval (Article 52). The President is obliged to sign legislation approved by the Majles, after the legal procedures have been completed and it has been communicated to him. After signing, he must forward it to the responsible authorities for implementation (Article 123).

Although the President crucially lacks the veto power over the budget, in general the relationship between the legislature and the executive is subject to constitutionally provided mutual checks and balances.
For example, the Constitution requires that amendments to government bills proposed by members of Majles that entail the reduction of the public income or the increase of public expenditure could be introduced, only if the means for compensating for the decrease in income or for meeting the new expenditure are also specified (Article 75).

The main volume of the budget consists of four sections. The first section presents the notes; the second section displays the summary tables. The third section details the resources and the fourth the expenses of the government. The main part of the budget, i.e. sections three and four, is organized around specific executive bodies, which can be a ministry, province, a public institution, a bonyad or even a library.

Generally there are different ways a foreign investor can invest in Iran. The three main schemes are as follows:

– Investment under the Foreign Investment Promotion and Protection Act (FIPPA)
– Investment in the Iranian mainland without the protection of FIPPA
– Investment in or via Free Trade Zones

Due to its importance, we start to describe the very first scheme:

The first legal framework for foreign investment in Iran was defined under the law for the Attraction and Protection of Foreign Investments (LAPFI) in 1955. This legal regime was in effect up to May 2002, when the new foreign investment law entitled the Foreign Investment Promotion and Protection Act (FIPPA) became effective.
The legal corpus governing foreign investments in Iran constitutes the FIPPA, its implementing regulations as well as legislation applicable for the establishment and conduct of economic activities in the country.

Even though FIPPA has the main ingredients of LAPFI, but some specific enhancements and features of FIPPA can be outlined as follows:

– Broader fields for involvement by foreign investors including in major infrastructure
– Recognition of new modes of foreign capital exposure in addition to Foreign Direct Investment (FDI), e.g. project financing, buy-back arrangements, BOT and civil (unincorporated) partnerships
– Introduction of new legal options governing the government-investor relations
– Under FIPPA, foreign capital is defined in a very broad and diversified manner: be it in cash or in- Kind, such as machinery and equipment, raw materials, parts, specialized services as well as intellectual property
– No restriction of whatever nature is imposed on the manner, type and volume of investment,
percentage of shareholding, profit and capital repatriation as well as internal relations between the
parties to an investment project
– FIPPA provides full security against the risks which are generally referred to as non-commercial risks.
Repatriation of the principal capital, dividend and capital gain, compensation in case of expropriation or nationalization and compensation in case of business disruption by the government are fully
guaranteed
– There should be no discrimination vis-à-vis foreign investors and all facilities, privileges, exemptions and any accord to local investors will be equally extended to foreign investors
– The” most favored nations treatment” may be applicable to the investors of countries with which the Iranian government has entered into a Bilateral Investment Treaty (BIT). Currently 41 BIT agreements have been signed with most of the European, South-East Asian, Middle Eastern and North and South African countries

Any investments will be handled through the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI), which was founded in June 1975 and constitutes the foreign investment authority of Iran. The head of this body is the vice minister for investments and international affairs of the ministry of economic affairs and finance. The functions of the organization range from investment to financing as well as from bilateral to regional and international relations.